Changes to the QCA Corporate Governance Code

What’s the issue?

The Quoted Companies Alliance (QCA) revised the QCA Code in 2023. Companies are required to apply this revised Code (2023 Code) for accounting periods beginning on or after 1 April 2024.

Background

The QCA Code was first introduced in 2013 and was then revised in 2018 after the changes to the Alternative Investment Market (AIM) rules that required AIM listed companies to apply a recognised corporate governance code. The Research Report on Corporate Governance on AIM in 2019 found that around 90% of AIM companies adopted the QCA Code, which aims to provide a system for running the board and committees and a framework for disclosing this.

What are the disclosure requirements?

Under AIM Rule 26, AIM listed companies are required to adopt a corporate governance code and describe how they comply with and where they depart from that code in both their annual reports and websites.

What are the key changes to the QCA Code?

The 2023 Code moves the governance and disclosure recommendations significantly closer to those of the UK Corporate Governance Code. It consists of 10 principles and a set of relevant practices and ‘applications’, arranged under headings of:

• Delivering growth.
• Maintaining a dynamic management framework.
• Building trust with shareholders and other stakeholders.

Similar to the 2018 QCA Code, adoptees are recommended to prepare a corporate governance statement in their annual reports and websites to:

• Explain how they applied the principles.
• Provide explanations for non-compliance with any ‘applications’.

Companies may include signposting/cross-referencing to those parts of the annual report to describe how the principles have been applied. In addition to providing disclosures in their annual reports, companies are required to provide a corporate governance statement and other recommended disclosures on their websites.

Below are the key changes to the 2023 Code compared to the 2018 Code:

• Principle 4 - Stakeholder interests: More detail of governance mechanisms has been added to applications and the principle now specifically mentions board responsibility for social and environmental responsibilities, an area notably removed from the wording of early drafts in the review of the UK Corporate Governance Code. 
• Principle 5 - Risk management, internal controls and assurance activities: Greater detail on internal controls and risk management, both in applications and recommended disclosure.  Addition of a specific note that all potential risks, including climate risks, should be considered. A specific application covering the independence of auditors has been added.
• Principle 9 – Remuneration: This is a new principle. Companies should establish a remuneration policy which aligns with company's purpose, strategy, culture and stage of development, promotes their long-term growth and motivates their senior management.

The 2023 Code provides more detailed guidance on how each principle/application should be applied and, in particular, refers more explicitly to supplementary guidance on particular committees. The Remuneration Committee Guide, published in 2020, explains what is expected of adoptees’ remuneration committees and what to disclose in their directors’ remuneration reports. The additional recommended disclosure, both QCA recommended and optional enhanced disclosures, listed in the guide ,is similar to those required by listed companies under Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.

The Environmental and Social Guide, published in 2024, explains the disclosures expected in ESG-related matters. The ESG disclosure requirement is similar to those required under the Task Force on Climate-Related Financial Disclosures.

What are the new disclosure requirements for an AIM listed company’s annual financial report?

The Chair’s corporate governance statement: The 2023 Code adds more detail on the link with purpose and outcomes of arrangements, specifically:

• How corporate governance arrangements support and align with the business purpose.
• Outcomes of key governance-related developments.
• Governance approaches to ensure effective board and committee operations and their oversight.
• Changes to governance arrangements and practices due to company growth, regulatory changes, shareholder expectations, and updates to best practice.

Other required annual report disclosures: Under the 2023 Code, companies should:

• Define desired company culture, and explain how it supports company purpose, strategy and business model.
• Describe key environmental and social issues impacting the business, and related key performance indicators that companies use for tracking performance.
• Explain how effective risk management and internal control are achieved.
• Describe how boards oversee climate-related risks, and how risks are managed.
• Explain when the board performance review performed by external reviewer(s) will take place next. If there is none, provide explanations of why there is no externally facilitated board performance review.
• Describe the succession planning process.
• Describe the remuneration policy and practice.
• Describe how boards addressed challenges during the reporting period.

This is not an exhaustive list. All of the recommended disclosure requirements can be found in the QCA Corporate Governance Code 2023, the Audit Committee Guide, the Remuneration Committee Guide, the QCA Environmental and Social Guide and the QCA Code – Supporting Information and FAQs.

Practical Considerations: Preparation

Practical matters to consider when preparing a corporate governance report:

• Perform a compliance check against the QCA Code.
• Signposting within the report should give specific references and page numbers rather than sections of the annual report.
• Explain non-compliance and how the relevant principles are achieved without compliance with recommended applications.
• Explain when or under what circumstances the non-compliance with applications will be remedied.

Who is applicable to?

The revised QCA Code is applicable to companies which are listed on the AIM of the London Stock Exchange or on the Aquis Stock Exchange and have chosen to adopt the QCA Code.

When is it effective?

It applies to accounting periods beginning on or after 1 April 2024. Practically, this means that it is required to be applied for the first time to accounting periods ending after 31 March 2025, for instance, 31 December 2025.

Where can I get more guidance?

Companies can purchase a copy of the QCA Corporate Governance Code 2023 from the QCA website. The QCA has also published a number of guidance documents, which provide more information on good practice in establishing and maintaining effective audit, ESG and remuneration committees.